With the housing market once again showing signs of cooling, there has been some debate in recent weeks surrounding the question of if the government will introduce a new first home owner’s grant to prop up the market. So you can imagine the surprise we received today, when news broke that the Gillard Government has been discussing options to scale back negative gearing with senior labour figures and the unions. Any thought of a new grant to prop the market back up is now distant thought.
It is understood discussions have so far included the scaling back of negative gearing based on the number of properties owned, starting at investors with two or more properties. There are about 294,000 investors that hold more than two investment properties.
Naturally, any notion to abolish the immensely popular tax dodge will cause extreme political risk and voter backlash. In the 2009 financial year, 1.7 million property owners collectively made a $6.5 billion dollar net loss on their investment properties and claimed tax offsets. This is down slightly from the previous year where the a $8.6 billion dollar loss was made. The losses have been steady increasing since 2000 when the last positive net return was recorded.
Negative Gearing was first introduced to support the private residential tenancy market and help to encourage new home building for the purpose of rent. Over the years, the scheme has morphed into an instrument used by property speculators to help inflate house prices disproportional to rents causing over investment and economic distortion. Rental yields are now so low, that property as an investment no longer stacks up without the premise of large capital gains. This becomes a problem, such as is the case now. Housing affordability is now so stretched, there are few buyers in the market and most experts share the most optimistic view that the housing market will be flat for a couple of years. (The pessimistic view is, of course, a crash.) In effect, property investors are now subsidising renters with no prospect of capital gains for years to come while carrying the heighten risk that prices could fall, no different to that observed overseas.
Hardened investors immediately hit back today saying the removal of negative gearing will cause rents to skyrocket. However, there was little evidence of this in 1985 when the Hawke/Keating government effectively abolished negative gearing only to have it re-instated in 1987 after intense lobbying by the property industry. With such a claim, you would think Australia was the only country to not have negative gearing, but contrary, Australia is only one of three countries that allow the favourable tax offset on other income. All the other countries around the world can function without it.
Throughout our decade long property bubble, house prices have appreciated faster than the buyer’s ability to service them due to the availability of cheap and easy credit. As house prices rose, buyers simply borrowed more. This is most evident by the size of our household debt. Our household debt to household disposable income has quadrupled since the 1980s as home buyers are forced to borrow more and more. Renters, on the other hand do not have this “luxury” (burden?) – if rents rise faster than incomes, they cannot simply take out a bank loan to service the shortfall. Outside of the credit card, they must live within their means.
In a flat or falling market where negative gearing is effectively redundant, and when government budgets are tight and property investment losses huge, now is a good time to start winding down the rort. Wayne Swan warned of a difficult and unpopular budget. Maybe today’s announcement is further conditioning in the lead up to budget night?
Currently the housing market is suffering from a lack of first home buyers, effectively being priced out of the ponzi scheme. Any uncertainly regarding the medium to long term existence of negative gearing is now sure to immediately dent demand from investors. Soon, there won’t be that many players in the market. Any budget savings from the winding down of negative gearing is a much better alternative than re-instating 100% capital gains on investment properties in a slow and falling market.
Have your say – Do you think negative gearing should be retained in full, scaled back, or abolished?
ยป Talks test the water on negative gearing change – The Age, 21st April 2011.
Well it’s obvious isn’t it?
Simply make NG available on *New* Property only for 5-8 yrs.
Housing crisis solved.
Hey Average,
You mean the “ACCELERATION OF THE AUSSIE HOUSING CRASH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!”
Whether they scale NG back or to get rid of it or do nothing at all. The CRASH WILL HAPPEN!!!
We will see from now on how DISHONEST property agents and/or property spruikers are. For eg. Property doubles every 7-10 years, or there is housing crisis because of supply and demand. Right now, there is sooooooooo much supply but demand is falling!!!!!!
Negative gearing should be abolished as it distorts the market making irational investment decisions profitable through tax incentives
AverageBloke you have changed your tune alot in recent months!
Of course abolish it. A lot of pollies and public servants are in the rort as well as mum and dad investors. So it’s a brave decision but necessary to staunch an outflow of $$ the gov’t may wiah to spend elsewhere.
A big dip in prices is needed to inject some sanity into a stalling market. Young people are being needlessly saddled with housing debt to subsidise the tax benefits and capital appreciation of an older generation.
In 1973 the first house I bought was 2x my income which was the norm of the time. Now it’s 6x for the same house. After paying that mortgage now there ain’t a real lot left over for lifestyle.
Young people really need to rebel via their local MPs and insist on a better deal by getting rid of unnecessary subsidies which are really only bribes and middle class welfare.
Not at all watcher.
I believe in NG’s original purpose of stimulating new basic housing to provide a stable rental supply.
The NG of today is a mutated unfair tax dodge on steroids that has the complete opposite effect of what it was originally intended for.
BTW, there is a campaign at Facebook against negative gearing.
http://www.facebook.com/EndNegativeGearingTaxSubsidy
Hey AverageBloke if demand for housing is outstripping supply as we have been repeatedly reminded by the property spruikers over the past several years, why would you need a stimulus?
A stimulus is generally needed when aggregate demand drops thus providing a subsidy to an endeavor that is normally economically non viable.
You can’t have it both ways – have demand outstripping supply and also requiring a stimulus (through Negative Gearing).
The consequence of having both (Stimulus under high demand) is you get excessive price aberration.
This is what has happened in the past 10 years and look at the result – unsustainable high prices.
One would think now since demand for housing has apparently dropped, lets provide another stimulus – only a fool would react in such a way.
Demand has not dropped for housing rather Demand for housing at these high unsustainable prices has dropped because people are realising the big con it is.
When prices adjust to 3 times average income only then will people start to take interest in buying a home.
Till then the only players in the market will be the Specvester (Speculator-Investors) who will be selling to each other and canniblising themselves.
This will be fun to watch these assholes screw themselves.
I get what you are saying. In a perfect world it would be nice to abolish this rort altogether. But I’m just grateful for any movement at all in regards to NG as it has been held up as such a sacred cow and thus deemed political poison to any government will to even hint at making small adjustments to it.
Completey abolishing NG would be, I think, would be counter-productive. If NG would have been managed properly it would have fulfilled it’s original purpose of providing an affordable rental supply to those members of society who require it (transcient workers, students) with NG offering an incentive to investors rather than 100% tax offset which as we have all seen over the last few years it blatantly unfair and leads to property hoarding which in turn leads to an unafforable housing and rental market.
Dont abolish NG as it would kill the rental market because there would not be anything to rent. The govt cant get rid of it. I read an article or something the other day about only letting people NG 3 to 5 properties. I think that is more realistic. You abolish it like they did in the 80s then arises the same problem. Control it and only allow so much. Then the problem you have is there going to be enough stock to meet demand. Will it drive rent prices through the roof. Right now the fad is property like it has been everywhere else. It is going away.
LBS, so if the government does abolish NG (looks like it might be staged, do investors with 2 or more properties now, and then when they need to claw more money back, can it for everyone) does all the rentals just vaporise or something? I’m sorry, I can’t remember back to 1985 – maybe the vaporising of all the rental houses didn’t make the news. If they do sell them, to whom? Or will the banks just knock them down, like in the U.S. when the investors can’t sell them?
the aliens take the houses back if we end NG. such a stupid arguement.
If the Government abolishes NG, watch all the people scream as rents go through the roof. The simple fact is, the housing market needs property investors to fund+build new developments. If there is no NG or other incentives to get into the housing market, there will be an even bigger dwelling SHORTAGE.
As an example, l purchased a investment unit in Brisbane a few years ago. The whole complex was sold to investors and it is leased for short term tenants, with no permanent tenants in the building (ie, more than 6 months). If there is no NG or other incentives for investing in the property market, this building would never have been built and it would have put even MORE pressure on current dwellings and l’m sure that rents would have been HIGHER in surrounding areas as there wouldn’t have been as much supply.
Is there anything the current Government can’t stuff up????
There has never been a shortage of rental properties, that is BS. There has been too many Australians and Aussie companies making money off of everyone else’s tax dollars. Give negative gearing the flick! If Australians feel there is a lack of rental properties then scale back on our massive load of overseas students coming into our country and renting everything.
I know of one “property investor” as they like to call themselves who admitted if it wasn’t for the childcare rebate (tax dollars) they couldn’t send their kid to child care. Why are taxpayers propping up people who apparently own investment properties?
There needs to be an incentive for investors to buy property – yes this I agree!
The problem with negative gearing is that when the majority of people buy property, they are buying a liability not an asset. You are loosing money from day 1 with the “hope” & “expectation” that property will increase in “X” years and you will eventually make a reasonable profit. Mum-Dad investors have been lucky up until now, but with the market now going backwards people will start getting hurt.
Scrapping NG won’t work, but perhaps limiting this to new dwellings only.
@spz554,
True investors who make real profit are the companies whom build blocks of units and then on sell them to Mum-Dad investors whom think they are buying an investment, but really they are buying a liability that’s making a loss.
If NG was abolished in the short term rents may and most probably will rise. House prices are grossly over inflated and need to return to a more true value in the long term prices will come down to meet rents. When you look at the situation the market and the whole economy is so distorted it needs to come back to basic fundamentals and it will one way or another the more the government is involved the worse they make it. There is no way out of the situation without pain maybe a good 10 or 20 years of it.
Oh the humanity!
http://www.theaustralian.com.au/business/opinion/any-changes-to-negative-gearing-could-see-a-rush-by-investors-for-the-exits/story-e6frg9if-1226045226036
[i]spz554 Says: The simple fact is, the housing market needs property investors to fund+build new developments. [/i]
I agree with this single sentence with a strict emphasis on the word “new”.
The example provided by spz554 does not justify negative gearing. All you did was buy into someone else’s investment. You did not pool funds with other investors and build. You bought into something that was either already standing or was being sold off the plan.
You bought knowing that it would make a short-term loss with a view to long-term capital appreciation. You did nothing productive.
Gradually remove or reduce NG, house prices would likely drop with less speculation initially and when an equilibrium is reached where the price of property reflects value to an investor or would-be landlord, he will look to purchase again. The argument that there would be a shortage of rental properties may not be correct in the long term. If a property that was valued at 450k now was available for 200k in the future without the benefit of NG I am sure there would be interest from buyers and the rent would not need to blow out to offset the loss of NG as the lower purchase cost would reduce the need for a big increase in rent.
I am sure things always will want to revert to a natural balance, isn’t that exactly what has happened with NG and hasn
Both Liberal and Labor Governments have been propping up property investors for way too long. Not only should NG be abolished so should the FHG, baby bonus and childcare payments all of which are middle class welfare. After about 5 years house prices will then return to the mean. A bust in China will also be a trigger for our housing market to collapse. A home is supposed to be an affordable shelter from the elements not a tax shelter.
@spz554:
I beg to differ with your statement that there will be a SHORTAGE (emphasis yours) of rental housing if NG is removed. The rentals that are currently occupied will not evaporate. The rentals that are on the market to be rented will not go away. Certainly, there will be some investors that panic and put their rental properties on the market once NG is removed (maybe the majority), but they will not kick their renters out until the property sells (if and when it does at the current prices). If the property does not sell, and the investors fall behind in payments, the bank takes over the property. The bank does not have an incentive to kick renters out, thereby cutting their cashflow, and, if this is indeed the way the property market will go, sheer volume of NG properties out there may take a while to clear.
@ AverageBloke:
Thanks for the article, the most interesting detail is at the very end of the article: almost 80% of all investors that depend on a NG investment property are earning between $35K and $80K per year! Hardly seems like “smart money”, doesn’t it? A bit of anecdotal evidence: I know people who bought a property, lived in it for a year (to get tax benefits), moved out, rented their property out (to get NG), and are renters themselves (bank will not finance a purchase of another property). If NG is removed, what will be the drop in rental demand from the people in similar situation, who may elect to go back to their house?
Finally, another anecdotal evidence. In US (and I know, “it is different in Australia”, same as it was different in California, Nevada, Florida, UK…) house prices in an area of Florida I am very familiar with went from $450K to $150K over last 4 years, but the rents remained virtually same – dropped from $1,300 per month to $1,150 per month. Driven by a glut of properties for sale at much lower valuations, allowing new landlords to pick up rentals on the cheap and actually slightly drop rents to get their properties filled first. Incidentally, number of homeless people also went up.
Is it possible to claim negative gearing on vacant properties? I am assuming to some degree yes, but what are the precise rules? Clamping down on people who purposly leave places empty would be a good place to target. On my street in an eastern suburb ten min from city there are 4 places vacant 3 for over 2 years. And what of people who buy holiday homes in rural areas are they claiming a tax loss?